02/12/2020 - Renewable Energy

KEY POINTS

·      Solar Energy Corporation of India auctions, bids for supplying power from new solar PV plants purportedly hit historic new lows at Rs 2/kWh.

·      Such low prices cannot be justified simply through declines in panel prices (under threat due to growing disputes between India and China), advances in technology (which mostly bring marginal, not huge discontinuous changes in pricing), or any other traditional input into project finance models.

·      However, there are other reasons possibly driving down these bids. Consider foreign players who are looking to enter the Indian power market and test the waters. Such companies are willing to absorb a small loss (since RE plants are cheap to set up) to understand how to function and navigate in the Indian regulatory system.

·      New Saudi, French, and Spanish companies would fall into this bucket. Some domestic companies are desperate to deploy capital quickly;

·      Securing the land, procuring (largely imported) components, setting up the plant, connecting to the grid, ensuring PPA contract enforcement, and coaxing timely payment out of stressed discoms are among the tasks that await the auction winner.

·      A range of firms which entered this space with little to no experience in power and government contract management have sold low and exit the industry in the last five years; consequently, the industry has consolidated considerably.

·      Low RE prices do not fix state power planners’ concerns with variability (if the sun doesn’t shine or the wind does not blow) and reduce their desire for firm power, it does not get rid of discoms’ incentives to buy in-state power because of their severe liquidity constraints, it does not bump private companies up the hierarchy of payment priority.

·      So, while we should cautiously applaud these new lows in price discovery, we should also be aware that victory is still quite far in the distance; what we want is a stable, robust power system which can provide reliable, affordable power for all.

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